May 14, 2013

Europe's economy is crashing in such a way that even the least objective ideologues in Germany now must begin to feel uneasy.

It is not only Greece, but now Spain also (the country that had budget surpluses before 2008) crashing into unambiguous economic depression. Domestic demand continues to crumble rapidly in Spain, so that one wonders if the entire economy there might sag into social chaos.

But the reality isn't that some countries are in serious straights while others nations are doing fine, so that the overall situation might be sanguine....

IT IS a car crash of a data release. One simply can't look away. Hard to know precisely which part of the euro area's latest unemployment report is the most grimly compelling. The overall rate, at 12.1%? In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points. Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe's 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

The reality remains that Europe is crashing due to the pan-European trade imbalances created by the monetary union (which prevents natural price adjustment and easy rebounds by sinking economies) -- this increases the job strength in Germany, and that increase specifically comes from taking most available jobs away from the weaker economies via the Euro lock on relative prices.

What is the soundest, best economy in the world right now? Clearly that of the U.S.

Why? Demand -- people wanting to buy goods and services in sufficient amounts for an economy to function. The U.S. has adequate domestic demand.

Economies depend on demand and production, equally. But production exists around the world in abundance.

Demand is in short supply.

Unlike skating-on-thinning-ice Germany, deeply dependent on exports, or China, deeply dependent on exports and on financial bubbles, the U.S. in contrast has adequate demand at home and little financial froth.

The U.S. is stronger than Europe largely as a result of the just-in-time demand in the U.S. economy created by the stimulus of 2009-2010, and since then, due to a more cautiously gradual reduction in deficit spending than that of misguided Europe.

The U.S. and Europe both have similar overhangs of excessive private household debt weighing us down. But Europe tried rapid deficit reduction by cutting spending -- which backfired and resulted in deficits as a % of GDP rising in many Europeans countries. Because of weak demand, cutting government spending simply started downward spirals in European economies. Not, of course, in the European country that has had an profound pricing advantage over the others for more than a decade, locked in by the common currency (the Euro).

At this moment, U.S. strength is the sole bright spot in the global economy.

While Germany has been like a fire burning down a house (Europe), the U.S. is like a massive motor humming along.

But will it keep humming?

As China and Germany continue to force unemployment on the rest of the globe by consuming so much less than they produce, their massive trade surpluses threaten to eventually sink us all, and only a radical change towards more domestic consumption in these two economies offers any long term hope of avoiding the specter of war.